This is an Article 78 proceeding, transferred to this court pursuant to Civil Practice Act, § 1296, to review the determination of respondent, as Director of Sales Tax of Erie County, to the effect that petitioner is indebted to the Department of Sales Tax in the sum of $67,000 for unpaid sales and compensating use taxes. The Erie County Sales Tax Resolution (§ 1-g) and Use Tax Resolution (§ 1-d) do not tax the purchase of tangible personal property for either of the following purposes: '(1) for resale in the

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form of tangible personal property; or (2) for incorporation of such property as a material or a part into or for use or consumption directly and exclusively in the production of tangible personal property to be produced for sale by manufacturing, processing * * *.' The phrase 'tangible personal property' is defined in the enabling act to include electricity, L.1947, ch. 278, as amended by L.1948, ch. 651, and L.1950, ch. 589, McK.Unconsol.Laws, § 10001 et seq.

At its Huntley steam station in Erie County petitioner generates electricity. Large quantities of coal are consumed in a boiler, the steam from which operates a turbine-generator unit. The latter produces electricity at 13,000 volts. The coal, boiler, turbine and generator are concededly used 'directly and exclusively in the production' of electricity. They are, therefore, not taxable. The disputed items at the Huntley steam station are chiefly of two kinds: (1) Various coal and ash handling equipment. This includes the crane and car dumper which unload incoming coal; the conveyor belts which move it along toward the boiler; [144 N.Y.S.2d 461] the crushers, sprayers and metal detectors which process the coal as it moves along the belts, and the slag lines and pumps and narrow gauge railway which carry the ash and slag from the boiler. (2) Various structures. This includes concrete caissons and foundations which support the machinery; the steel superstructure which braces and steadies the same, and the building which houses the entire plant. Respondent contends that these items are not used or consumed 'directly and exclusively' in the production of electricity for sale. Petitioner replies that if there were a breakdown in the conveyor system which transports coal to the boiler, in the structures which support the boiler and other machinery, or in the equipment which carries off the waste slag and ash, the production of electricity would cease within a matter of hours.

One purpose of the sales and use tax resolutions is to reduce multiple taxation. The burden would be excessive if purchases for resale were taxed numerous times during the journey of goods to the ultimate consumer. The economic effect is no different where the tax is on raw materials or machines directly and exclusively used or consumed in production. If the policy of avoidance of multiple taxation were pursued to its natural and logical limits, all purchases by petitioner would be exempt to the extent that the Public Service Commission permits their inclusion as items of cost in fixing rate base. When sales taxes paid by the utility become a component of the final cost of electricity, the residential consumer pays a tax on a tax. The resolutions, however, strike a balance between the policy of avoiding

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multiple taxation and the need for raising revenue. Our task is to decide where that balance lies.

There is no simple test of what constitutes 'consumption directly and exclusively in the production' of electricity. The basic questions are the following: (1) Is the disputed item necessary to production? (2) How close, physically and causally, is the disputed item to the finished product? (3) Does the disputed item operate harmoniously with the admittedly exempt machinery to make an integrated and synchronized system?

After much study of the matter, we have concluded that the purchase or use of the coal and ash handling equipment is not taxable. That equipment is as essential to production as the generator itself. A serious breakdown in it would quickly stop or impair the output of electricity. We are further impressed with the synchronization and integration of the boiler and coal and ash equipment. The one could not operate without the other. Working together they make up a system which supplies the power from which electricity is produced. A taxing statute should receive a practical construction. Mendoza Fur Dyeing Works v. Taylor, 272 N.Y. 275, 281, 5 N.E.2d 818, 819. That is particularly true here, for the resolutions are designed to achieve a practical, economic result--avoidance of multiple taxation, at least to some extent. It is not [144 N.Y.S.2d 462] practical to divide a generating plant into 'distinct' ...

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